The municipal bond market is worth nearly four trillion dollars and directly supports municipal infrastructure that Americans use every day. Despite its size and importance, the market has relatively little oversight compared to other asset classes, such as stocks, options and futures. In fact, the Securities and Exchange Commission (SEC) described the market as “too opaque” as recently as 2012.
The Municipal Securities Rulemaking Board, or MSRB, is a Congressionally-chartered, self-regulated organization responsible for protecting investors, state and local government issuers, other municipal entities and the public interest by promoting a fair and efficient market. Since its inception, the organization has addressed these concerns.
Let’s take a closer look at the MSRB and how it impacts the muni bond market on a day-to-day basis.
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What Is the MSRB?
Municipal bonds have been around since the 1800s, but they were effectively unregulated until the mid-1970s. In the 1970s, retail investors were sold millions of dollars’ worth of New York City bonds until it came close to default in 1975. The state’s financial crisis drew the attention of Congress, which created the MSRB in June 1975 to protect investors.
The Congressionally-chartered, self-regulatory organization is governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The organization is subject to oversight by the SEC, which is responsible for governing all securities in the United States.
The MSRB’s official mandate is:
“To prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in municipal securities, to remove impediments to and perfect the mechanism of a free and open market in municipal securities, and, in general, to protect investors and the public interest.”
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What Does the MSRB Do?
The MSRB fulfills this mandate in several key ways, including setting rules, improving information access, educating investors and helping other regulatory bodies to enforce certain rules and regulations.
The organization’s primary focus is creating rules to govern the municipal bond market and its participants. Its Rule Book covers all non-administrative and non-definitional regulations, including topics like professional qualifications, fair practice, market transparency, and uniform practices. These rules are regularly updated based on market changes.
The most important rules for many investors concern municipal finance professionals. For instance, MSRB Rule G-18 requires dealers to seek the most favorable terms reasonably available for their retail customers’ transactions, while MSRB Rule G-19 requires that dealers have reasonable grounds for believing that a recommendation is suitable for an investor.
In addition to these rules, the organization improves transparency through access to information. The Electronic Municipal Market Access program, or EMMA, is maintained by the MSRB as an official source for municipal securities data and documents, including official statements, trade prices, financial disclosures, and market statistics.
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Dealers are generally required to report all trades in muni securities within 15 minutes of the time of the trade to the MSRB, under MSRB Rule G-14, which makes the information available through EMMA. EMMA also provides a broader view of muni market activity with muni market yield curves and indices, as well as a calendar of new bond issues.
The MSRB also seeks to help improve understanding of the muni bond market by providing free educational resources to both investors and issuers. In particular, the organization’s MuniEdPro provides free interactive online courses designed for muni market participants. The platform can even be used to fulfill continuing education requirements.
Finally, the MSRB assists with the enforcement of its rules and regulations. While it doesn’t carry out such enforcement on its own, the organization supports the Financial Industry Regulation Authority, or FINRA, the SEC and federal bank regulators that share responsibility for enforcement. It also communicates with the Internal Revenue Service (IRS).
The Bottom Line
The municipal bond market is massive and highly impactful on the day-to-day lives of everyone. While the market remains relatively opaque, the MSRB has dramatically improved investor protection and transparency with up-to-date rules, educational resources, transparent market data and assistance with enforcing those rules at the securities and tax levels.
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